AUDITING AND ASSURANCE SERVICES - QUESTION 12 & 13 - PLEASE AND THANK YOU! (BOTH QUESTION ANSWERS MUST BE 100-200 WORDS LONG)

12. You purchased a company's stocks and you suffered a big loss as a result of the market turbulence. You never read or used the company's audited financial statements, but you have a gut feeling that the auditor did not do a good job. Assuming that the relevant audited financial statements are associated with (1) the company's IPO, and (2) the second year filing after the IPO, explain how you can sue the auditor successfully.

13. Referring to Question 12, list and briefly explain all of the concepts you learned in Chapters 1, 2, 6, 4, 5 that would help the auditor believe that she should not be punished legally and professionally. Indicate in which of these five chapters each concept is being discussed. (PLEASE TRY TO PICK ONE CONCEPT FROM EACH CHAPTER)

CHAPTER 1 CONCEPTS FROM BOOK:

CHAPTER 3 CONCEPTS FROM BOOK:

CHAPTER 4 CONCEPTS FROM BOOK:

CHAPTER 5 CONCEPTS FROM BOOK:

CHAPTER 6 CONCEPTS FROM BOOK:

thank you all for giving the time to help with my questions!

SUMMARY This chapter defined auditing and distinguished auditing from accounting, Audits are valu- able because they reduce information risk, which lowers the cost of obtaining capital. The chapter also described attestation and assurance services, which include reports such as audits of historical financial statements and reports on the effectiveness of internal control over financial reporting. The chapter furthermore outlined different types of audits and auditors and requirements for becoming a CPA Accounting the recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making Assurance service-an independent professional service that improves the quality of information for decision makers Attestation service a type of assur- ance service in which the CPA firm issues a report about a subject matter or assertion that is the responsibility of another party Audit of historical financial state- ments-a form of attestation service in which the auditor issues a written report stating whether the financial statements are in material conformity with account- ing standards ESSENTIAL TERMS to determine whether the organization is following specific procedures, rules, or regulations set by some higherauthority: (2) an audit performed to determine whether an entity that receives financial assistance from the federal government has complied with specific laws and regulations Evidence any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria Financial statement audit-an audit conducted to determine whether the overall financial statements of an entity are stated in accordance with specified criteria (usually U.S. or international accounting standards) Government accountability office auditor-an auditor working for the U.S. Government Accountability Office (GAO); the GAO reports to and is respon- sible solely to Congress Independent auditors-certified pub- lic accountants or accounting firms that perform audits of commercial and non- commercial entities Information risk-the risk that infor- mation upon which a business decision is made is inaccurate Internal auditors--auditors employed by a company to audit for the company's board of directors and management Internal control over financial reporting an engagement in which the auditor reports on the effectiveness of Audit report the communication of audit findings to users Auditing the accumulation and evalu- ation of evidence about information to determine and report on the degree of correspondence between the information and established criteria Certified public accountanta person who has met state regulatory require- ments, including passing the Uniform CPA Examination, and has thus been cer- tified: a CPA may have as his or her pri- mary responsibility the performance of the audit function on historical financial statements of commercial and noncom- mercial financial entities Compliance audit-(1) a review of an organization's financial records performed Chapter I / THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICES 17 internal control over financial reporting: such reports are required for accelerated filer public companies under Section 404 of the Sarbanes-Oxley Act Internal revenue -auditors who work for the Internal Revenue Service (IRS) and conduct examinations of taxpayers' returns Operational audit a review of any part of an organization's operating procedures and methods for the purpose of evaluating efficiency and effectiveness Review of historical financial state- ments a form of attestation in which a CPA firm issues a written report that provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards Sarbanes-Oxley Acta federal securi- ties law passed in 2002 that provides for additional regulation of public companies and their auditors; the Act established the Public Company Accounting Oversight Board and also requires auditors of larger public companies to audit the effective- ness of internal control over financial reporting SUMMARY This chapter described the auditor's standard unmodified opinion audit report under AICPA and PCAOB standards, as well as reports on internal control over financial report- ing under Section 404 of the Sarbanes-Oxley Act. The four categories of audit reports and the auditor's decision process in choosing the appropriate audit report to issue were then discussed. In some circumstances, an explanatory paragraph or nonstandard wording of the unmodified opinion audit report is required. When there is a material departure from GAAP or a material limitation on the scope of the audit, the audit opinion must be modi- fied. The appropriate report to issue in these circumstances depends on whether the situ- ation involves a GAAP departure or a scope limitation, as well as the level of materiality. Adverse opiniona report issued when the auditor believes the financial state- ments are so materially misstated or mis- leading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP Combined report on financial state- ments and internal control over finan- cial reporting-audit report on the fi- nancial statements and the effectiveness of internal control over financial reporting required for larger public companies un- der Section 404 of the Sarbanes-Oxley Act Disclaimer of opiniona report issued when the auditor is not able to become sat- isfied that the overall financial statements are fairly presented or the auditor is not independent Material misstatement-a misstatement in the financial statements, knowledge of which would affect a decision of a reason- able user of the statements Qualified opiniona report issued when the auditor believes that the over- all financial statements are fairly stated but that either the scope of the audit was ESSENTIAL TERMS limited or the financial data indicated a failure to follow GAAP Separate report on internal control over financial reporting-audit report on the effectiveness of internal control over financial reporting required for larger public companies under Section 404 of the Sarbanes-Oxley Act that cross-references the separate audit report on the financial statements Standard unmodified opinion audit re- portthe report a CPA issues when all au- diting conditions have been met, no signif- icant misstatements have been discovered and left uncorrected, and it is the auditor's opinion that the financial statements are fairly stated in accordance with the appli- cable financial reporting framework Unmodified opinion audit report with emphasis-of-matter paragraph or non- standard report wording-an unmodi- fied opinion audit report in which the fi- nancial statements are fairly presented, but the auditor believes it is important, or is required, to provide additional information or the wording of other paragraphs of the report require revision Chapter 3 / AUDIT REPORTS 69 SUMMARY The demand for audit and other assurance services provided by CPA firms depends on public confidence in the profession. This chapter discussed the role of ethics in society and the unique ethical responsibilities of CPAs. The professional activities of CPAs are governed by the AICPA Code of Professional Con- duct, and auditors of public companies are also subject to oversight by the PCAOB and SEC. Foremost of all ethical responsibilities of CPAs is the need for independence. The rules of conduct and interpretations provide guidance on permissible financial and other interests to help CPAs maintain independence. Other rules of conduct are also designed to maintain public confidence in the profession. The ethical responsibilities of CPAs are enforced by the AICPA for members and by state boards of accountancy for licensed CPAs. Audit committeeselected members of a client's board of directors whose respon- sibilities include helping auditors to remain independent of management Confidential client information client information that may not be disclosed without the specific consent of the client except under authoritative professional or legal investigation Direct financial interestthe owner- ship of stock or other equity shares by members or their immediate family Ethical dilemma-a situation in which a decision must be made about the appropri- ate behavior Ethicsa set of moral principles or values Independence in appearancethe auditor's ability to maintain an unbiased viewpoint in the eyes of others ESSENTIAL TERMS Independence of mindthe auditor's state of mind that enables an unbiased view- point in the performance of professional services; also described as independent in fact" Independent in fact-see independence of mind" Indirect financial interesta close, but not direct, ownership relationship between the auditor and the client; an example is the ownership of stock by a member's grand- parent Privileged information client informa- tion that the professional cannot be legally required to provide; information that an accountant obtains from a client is confi- dential but not privileged SUMMARY This chapter provides insight into the environment in which CPAs operate by highlighting the significance of the legal liability facing the CPA profession. No reasonable CPA wants to eliminate the profession's legal responsibility for fraudulent or incompetent perfor- mance. It is certainly in the profession's best interest to maintain public trust in the com- petent performance of the auditing profession, while avoiding liability for cases involving strictly business failure and not audit failure. To more effectively avoid legal liability, CPAS need to have an understanding of how they can be held liable to their clients or third par- ties. Knowledge about how CPAs are liable to clients under common law, to third parties under common law, to third parties under federal securities laws, and for criminal liabil- ity, provides auditors an awareness of issues that may subject them to greater liability. CPAs can protect themselves from legal liability in numerous ways, and the profession has worked diligently to identify ways to help CPAs reduce the profession's potential ex- posure. It is necessary for the profession and society to determine a reasonable trade-off between the degree of responsibility the auditor should take for the financial statements and the audit cost to society. CPAs, Congress, the SEC and the courts will all continue to have a major influence in shaping the final solution. ESSENTIAL TERMS Absence of causal connection-an auditor's legal defense under which the auditor contends that the damages claimed by the client were not brought about by any act of the auditor Audit failure a situation in which the auditor issues an incorrect audit opinion as the result of an underlying failure to comply with the requirements of auditing standards 132 Part 1 / THE AUDITING PROFESSION Audit risk the risk that the auditor will conclude after conducting an adequate audit that the financial statements are fairly stated and an unmodified opinion can therefore be issued when, in fact, they are materially misstated Business failure the situation when a business is unable to repay its lenders or meet the expectations of its investors be- cause of economic or business conditions Contributory negligence an auditor's legal defense under which the auditor claims that the client failed to perform certain obligations and that it is the cli- ent's failure to perform those obligations that brought about the claimed damages Criminal liability for accountants- defrauding a person through knowing in- volvement with false financial statements Foreign Corrupt Practices Act of 1977-a federal statute that makes it il- legal to offer a bribe to an official of a foreign country for the purpose of exert- ing influence and obtaining or retaining business and that requires U.S. companies to maintain reasonably complete and ac- curate records and an adequate system of internal control Foreseeable users-an unlimited class of users that the auditor should have reasonably been able to foresee as being likely users of financial statements Foreseen users -members of a limited class of users who the auditor is aware will rely on the financial statements Lack of duty to performan auditor's legal defense under which the auditor claims that no contract existed with the client; therefore, no duty existed to per- form the disputed service Legal liability-the professional's obliga- tion under the law to provide a reasonable level of care while performing work for those served Nonnegligent performance-an audi- tor's legal defense under which the audi- tor claims that the audit was performed in accordance with auditing standards Private Securities Litigation Reform Act of 1995-a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation Prudent person concept the legal concept that a person has a duty to exer- cise reasonable care and diligence in the performance of obligations to another Scienter-commission of an act with knowledge or intent to deceive Securities Act of 1933a federal stat- ute dealing with companies that register and sell securities to the public; under the statute third parties who are origi- nal purchasers of securities may recover damages from the auditor if the financial statements are misstated, unless the au- ditor proves that the audit was adequate or that the third party's loss was caused by factors other than misleading financial statements Securities Exchange Act of 1934a federal statute dealing with companies that trade securities on national and over-the-counter exchanges, auditors are involved because the annual reporting requirements include audited financial statements Ultramares doctrinea common-law ap- proach to third-party liability, established in 1931 in the case of Ultramares Corporation v. Touche, in which ordinary negligence is insufficient for liability to third parties be- cause of the lack of privity of contract between the third party and the auditor, unless the third party is a primary beneficiary SUMMARY This chapter described management's responsibility for the financial statements and internal control and the auditor's responsibility to audit the financial statements and the effectiveness of internal control over financial reporting. This chapter emphasized the critical importance of maintaining an attitude of professional skepticism and highlighted a professional judgment process to help auditor decision making. This chapter also discussed management assertions and the related objectives of the audit and the way the auditor sub- divides an audit to result in specific audit objectives. The auditor then accumulates evidence to obtain assurance that each audit objective has been satisfied. The illustration for sales transactions and accounts receivable shows that the auditor can obtain assurance by accu- mulating evidence using tests of controls, substantive tests of transactions, substantive ana- lytical procedures, and tests of details of balances. In some audits, there is more emphasis on certain tests such as substantive analytical procedures and tests of controls, whereas in others, there is emphasis on substantive tests of transactions and tests of details of balances. ESSENTIAL TERMS Analytical procedures-evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data Balance related audit objectives-eight audit objectives that must be met before the auditor can conclude that any given account balance is fairly stated; the general balance- related audit objectives are existence.com pleteness, accuracy, classification, cutofi detail tie-in, realizable value, and rights and obligations Cycle approacha method of dividing an audit by keeping closely related types of transactions and account balances in the same segment Error-an unintentional misstatement of the financial statements 168 Part 2 / THE AUDIT PROCESS Fraud-an intentional misstatement of the financial statements Fraudulent financial reporting intentional misstatements or omissions of amounts or disclosures in financial statements to deceive users; often called management fraud Management assertions-implied or expressed representations by manage- ment about classes of transactions, related account balances, and presentation and disclosures in the financial statements Misappropriation of assets fraud involving the theft of an entity's assets: often called defalcation Noncompliance with laws and regula- tions failure to comply with applicable laws and regulations, often referred to as illegal acts that is alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence Relevant assertions assertions that have a meaningful bearing on whether an account is fairly stated and used to assess the risk of material misstatement and the design and performance of audit procedures Risk assessment procedures-audit pro- cedures performed to obtain an understand- ing of the entity and its environment includ- ing the entity's internal control, to identify and assess the risks of material misstatement Substantive analytical procedurean analytical procedure in which the auditor develops an expectation of recorded amounts or ratios to provide evidence sup- porting an account balance Substantive tests of transactions- audit procedures testing for monetary mis- statements to determine whether the six transaction-related audit objectives have been satisfied for each class of transactions Tests of controls-audit procedures to test the effectiveness of controls in support of a reduced assessed control risk Tests of details of balances audit pro- cedures testing for rmonetary misstatements TO whethe eight ance- related audit objectives have been satisfied for each significant account balance Transaction-related audit objectives - six audit objectives that must be met before the auditor can conclude that the total for any given class of transactions is fairly stated; the general transaction-related audit objectives are occurrence, complete- ness, accuracy, classification, timing, and posting and summarization Phases of the audit process--the four aspects of a complete audit: (1) plan and design an audit approach, (2) perform tests of controls and substantive tests of trans- actions, (3) perform substantive analytical procedures and tests of details of balances. and (4) complete the audit and issue an audit report Presentation and disclosure-related audit objectives-four audit objectives that must be met before the auditor can conclude that presentation and disclo- sures are fairly stated; the four presenta- tion and disclosure-related audit objectives are occurrence and rights and obligations, completeness, accuracy and valuation, and classification and understandability Professional skepticism an attitude of the auditor that includes a questioning mind